5 Earnings Short-Squeeze Plays to Consider

WINDERMERE, Fla. ( Stockpickr) -- Short-sellers hate being caught short a stock that reports a blowout quarter. When this happens, we often see a tradable short squeeze develop as the bears rush to cover their positions to avoid big losses. Even the best short-sellers know that it's never a great idea to stay short once a bullish earnings report sparks a big short-covering rally.

This is why I scan the market for heavily shorted stocks that are about to report earnings. You only need to find a few of these stocks in a year to help enhance your portfolio returns -- the gains become so outsized in such a short time frame that your profits add up quickly.

That said, let's not forget that stocks are heavily shorted for a reason, so you have to use trading discipline and sound money management when playing earnings short-squeeze candidates. It's important that you don't go betting the farm on these plays and that you manage your risk accordingly. Sometimes the best play is to wait for the stock to break out following the report before you jump in to profit off a short squeeze. This way, you're letting the trend emerge after the market has digested all of the news.

Of course, sometimes the stock is going to be in such high demand that you risk missing a lot of the move by waiting. That's why it can be worth betting prior to the report -- but only if the stock is acting technically very bullish and you have a very strong conviction that it is going to rip higher. Just remember that even when you have that conviction and have done your due diligence, the stock can still get hammered if The Street doesn't like the numbers or guidance.

If you do decide to bet ahead of a quarter, then you might want to use options to limit your capital exposure. Heavily shorted stocks are usually the names that make the biggest post-earnings moves and have the most volatility. I personally prefer to wait until all the earnings-related news is out for a heavily shorted stock and then jump in and trade the prevailing trend.

My first earnings short-squeeze trade idea is Salesforce.com ( CRM), which is set to release numbers on Tuesday after the market close. This company provides enterprise cloud computing and social enterprise solutions, and it's dedicated to helping customers transform themselves into social enterprises. Wall Street analysts, on average, expect Salesforce.com to report revenue of $776.52 million on earnings of 32 cents per share.

A William Blair analyst recently said that Salesforce.com could beat Wall Street estimates on both its top and bottom lines in the quarter. That William Blair analyst said that they believed Salesforce.com inked a sizable deal with a global sports apparel manufacturer during the quarter.

The current short interest as a percentage of the float for Salesforce.com is rather high at 11.7%. That means that out of the 127.54 million shares in the tradable float, 14.94 million shares are sold short by the bears. If Salesforce.com can beat earnings and raise guidance, then this stock could explode higher post-earnings.

From a technical perspective, CRM is currently trending above its 200-day moving average and just below its 50-day moving average, which is neutral trendwise. This stock has been trading sideways for the last month, with shares moving between $139.04 on the downside and $149.57 on the upside. A move outside of that range post-earnings will likely set up the next major trend for CRM.

If you're bullish on CRM, then I would wait until after its report and look for long-biased trades once this stock manages to break out above some near-term overhead resistance levels at $149.57 to $150.20 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1,947,780 shares. If that breakout triggers, then CRM will set up to re-test or possibly take out its next major overhead resistance levels at $155 to $159.85 a share.

I would simply avoid CRM or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 200-day moving average of $143.95 a share. If we get that action, then CRM will set up to re-test or possibly take out its next major support levels at $139.08 to $139.04 a share. Any high-volume move below those levels could send CRM back below $130 a share post-earnings.

Books-A-Million

Another potential earnings short-squeeze play is Books-A-Million ( BAMM), which is set to release its numbers on Tuesday after the market close. This company is engaged in the sale of books, magazines and related items through a chain of retail bookstores. There are currently no Wall Street estimates available for Books-A-Million.

The current short interest as a percentage of the float for Books-A-Million is extremely high at 20.4%. That means that out of the 10.13 million shares in the tradable float, 1.16 million shares are sold short by the bears. This stock has a very low float and a high short interest. Any bullish earnings news could easily spark a monster short-squeeze for BAMM post-earnings.

From a technical perspective, BAMM is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending for the last month, with shares dropping from $2.95 to its recent low of $2.30 a share. During that downtrend, shares of BAMM have mostly been making lower highs and lower lows, which is bearish technical price action.

If you're in the bull camp on BAMM, then I would wait until after its report and look for long-biased trades once it manages to break out above some near-term overhead resistance at $2.50 with high volume. Look for volume on that move that registers near or above its three-month average action of 17,425 shares. If we get that breakout, then BAMM will set up to re-test or possibly take its 50-day at $2.71 and its 200-day at $2.82 a share. Any high-volume move above those key moving averages will then put $2.95 to $3.20 into focus for shares of BAMM.

Tilly's

One potential earnings short-squeeze trade is Tilly's ( TLYS), which is set to release numbers on Tuesday after the market close. This company is a specialty retailer of West Coast inspired apparel, footwear and accessories. Wall Street analysts, on average, expect Tilly's to report revenue of $128.66 million on earnings of 30 cents per share.

The current short interest as a percentage of the float for Tilly's stands at 3.9%. That means that out of the 17.94 million shares in the tradable float, 357,000 shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 4.7%, or by about 16,000 shares. If the bears are caught pressing their bets into this quarter, then we could easily see a decent short-squeeze develop post-earnings.

From a technical perspective, TLYS is currently trending below its 50-day moving average, which is bearish. This stock has been downtrending for the last three months and change, with shares falling from a high of $19.57 to a recent low of $14.43 a share. During that move lower, shares of TLYS have been mostly making lower highs and lower lows, which is bearish technical price action. That said, the stock has now started to rebound sharply off that recent low and it's quickly moving within range of triggering a near-term breakout trade.

If you're bullish on TLYS, then I would wait until after its report and look for long-biased trades once it manages to break out above some near-term overhead resistance levels at $16.32 to $71.15 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 104,814 shares. If that breakout triggers, then TLYS will set up to re-test or possibly take out its next major overhead resistance levels at $18.45 to $19 a share. Any high-volume move above those levels will then set up TLYS to take out its all-time high of $19.57 a share.

I would avoid TLYS or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below some key near-term support levels at $14.43 to $13.70 a share with high volume. If we get that action, then TLYS will set up to enter all-time low territory below $13.70 a share.

GasLog

Another earnings short-squeeze candidate is the GasLog ( GLOG), which is set to release numbers on Wednesday before the market open. This company is an owner, operator and manager of liquefied natural gas (LNG) carriers providing support to international energy companies as part of their LNG logistics chain. Wall Street analysts, on average, expect GasLog to report revenue of $16.95 million on earnings of 4 cents per share.

This stock has been downtrending modestly heading into earnings, with shares off by around 11% so far in 2012. Shares of GasLog are currently trading just two points off its 52-week low of $8.76 a share ahead of its report.

The current short interest as a percentage of the float for the GasLog sits at 3.4%. That means that out of the 23.46 million shares in the tradable float, 759,000 shares are sold short by the bears. This isn't a huge short interest, but it's more than enough to spark a tradable short-covering rally if GasLog delivers the earnings news the bulls are looking for.

From a technical perspective, GLOG is currently trending below its 50-day moving average, which is bearish. This stock has been downtrending a bit for the last two months, with shares falling from a high of $12.29 to its recent low of $10.35 a share. During that downtrend, shares of GLOG have been consistently making lower highs and lower lows, which is bearish technical price action. That said, GLOG has now started to rebound off that recent low and move within range of triggering a near-term breakout trade.

If you're bullish on GLOG, then I would wait until after its report and look for long-biased trades if this stock can manage to break out above some near-term overhead resistance levels at $11.23 to $11.84 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 126,306 shares. If that breakout triggers soon, then GLOG will set up to re-test or possibly take out its next major overhead resistance level at $12.29 a share. Any high-volume move above $12.29 will then put $13.50 to $14 into focus for GLOG.

I would avoid GLOG or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below some key near-term support at $10.35 a share with heavy volume. If we get that action, then GLOG will set up to re-test or possibly take out its next major support levels at $9.75 to $9.50 a share.

Deere & Co

My final earnings short-squeeze play is Deere & Co. ( DE), which is set to release numbers on Wednesday before the market open. This company operates in three major business segments: agriculture/turf, construction/forestry and financial services. Wall Street analysts, on average, expect Deere & Co. to report revenue of $8.85 billion on earnings of $1.88 per share.

During the last quarter, this company missed Wall Street estimates by 33 cents per share, coming in at a net income of $1.98 per share versus estimates of $2.31 per share. That miss was due to a mix of global sluggishness and production woes at home related to its new line of combines. In the second quarter, this company beat Wall Street estimates by 7 cents per share.

The current short interest as a percentage of the float for Deere & Co. stands at 2.8%. That means that out of the 365.46 million shares in the tradable float, 10.93 million shares are sold short by the bears. This isn't a huge short interest, but it's more than enough to spark a decent short-covering rally if Deere & Co. reports a solid quarter and raises forward guidance.

From a technical perspective, DE is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strongly for the last three months, with shares soaring from a low of $72.73 to a recent high of $87.50 a share. During that uptrend, shares of DE have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed DE within range of triggering a near-term breakout trade post-earnings.

If you're in the bull camp on DE, then I would wait until after its report and look for long-biased trades once this stock manages to take out some key overhead resistance levels at $87.50 to $88.16 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 3,409,100 shares. If that breakout triggers, then DE will set up to re-test or possibly take out its next major overhead resistance levels at $92.50 to $95 a share.

I would simply avoid DE or look for short-biased trades if after earnings it fails to trigger that breakout, and then moves back below some key support levels at $83.31 to $82 a share with heavy volume. If we get that action, then DE will set up to re-test or possibly take out its next major support levels at $80 to $79.36 a share post-earnings.

At the time of publication, author had no positions in stocks mentioned.

At the time of publication, author had no positions in stocks mentioned.

Roberto Pedone, based out of Windermere, Fla., is an independent trader who focuses on technical analysis for small- and large-cap stocks, options, futures, commodities and currencies. Roberto studied international business at the Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany. His work has appeared on financial outlets including CNBC.com and Forbes.com. You can follow Pedone on Twitter at www.twitter.com/zerosum24 or @zerosum24.